Cagey look at negative gearing

A revamp of the taxation of property, shares and other assets so investments are taxed more equitably could be achieved without hurting the budget bottom line, previously secret Treasury documents reveal.

The switch to a more neutral taxation of personal capital income, including capital gains, interest income and net rental income, was proposed by the Henry tax review in an attempt to replace the existing ad hoc system that favours and discriminates against different investments.

Treasury says the proposed change could add about $1 billion annually to the budget bottom line.

While the proposal would fall short of former treasurer
Paul Keating
’s controversial – and temporary – quarantining of negative gearing in 1985, investors who negatively gear property would pay more tax.

But those with positive net rental income would pay less tax.

Under the system, most non-labour personal income would be taxed at marginal rates, with a discount of 40 per cent.

According to Treasury estimates, a person with a taxable income of $150,000 with a negatively geared property would pay about $1900 more each year.

But the equivalent taxpayer with positive net rental income would pay about $1800 less tax.

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The Labor government ruled out touching negative gearing when it unveiled its initial response to the Henry review in May.

It adopted the related recommendations in part, by offering a 50 per cent tax discount on up to $1000 of interest earned by individuals from deposits, bonds, debentures and annuity products.

Given the backlash against Mr Keating’s crackdown on negative gearing, it would be a brave government or opposition to adopt the changes in full.

Grattan Institute productivity director Saul Eslake said he would “love to see" the removal of distortions in the tax system that encourage excessive borrowing.

“If you wanted to start out to design a tax system that would encourage people to get wealthy through borrowing and speculation and discourage them from getting wealthy through working and saving, it would be hard to go past the current Australian system," he said.

He said the tax system should tax income less and wealth more.

The Treasury costings are based on a sweeping overhaul of personal tax rates and thresholds.

Under the proposal that would cost the budget $3 billion a year, the $6000 tax-free threshold would be lifted to $25,000; there would be a 35 per cent rate for incomes up to $180,000 and a 45 per cent rate thereafter.

The total package of personal income tax changes put forward by Dr Henry would cost $1.9 billion a year, Treasury estimates.

As part of the package, income support payments would be exempt from tax; there would be a standard tax deduction of $500 (in line with what the government has adopted); redundancy payments would be taxable; offsets for seniors would be abolished and the 1.5 per cent Medicare levy axed.

The revenue analysis released by Treasury also explores the complex tax rules for superannuation.

Dr Henry wanted to remove concessional super contributions and tax contributions at a taxpayer’s marginal rate, provide a 20 per cent rebate, and then tax super fund earnings at 7.5 per cent.

The Coalition has expressed some interest in the proposal, but was still assessing the Treasury costings on Friday. The government has rejected the Henry findings and opted to lift the super guarantee levy gradually from 9 per cent to 12 per cent by 2020.

The change has strong support from the super industry, but was not recommended by Dr Henry because he found 9 per cent to be “adequate" and was concerned low- and middle-income earners could trade off current income for future savings.

In his first major speech on Friday, Superannuation Minister
Bill Shorten
said the super increase was not a tax on business as wages, not profits, would fund super increases in the next few years.